BNP: AUD remains vulnerable and sensitive to global risk

From the FXWW Chatroom: In Australia, January unemployment rate came out slightly below expectations (5.7% vs 5.8% expected), as well as the participation rate (64.6% vs 64.7% expected). We did not see any significant market reaction and AUDUSD is still trading at post-US election highs. The main drivers of AUD gains have been external this month, with the better risk environment providing support. In our view, AUD remains vulnerable. Our BNP Paribas Positioning Analysis indicates that it has the longest position in G10 (+32 on a -/+50 scale) and our short term fair value model STEER™ suggests that the pair is too rich even to current levels of rates and equities. We think the USD has more to gain from the current reflationary environment than the AUD does. As Fed pricing and US real rates adjust higher we expect AUDUSD to correct lower. In Japan, weekly Japanese portfolio flow data signals that Japanese domestic investors continue to be net sellers of foreign assets (see chart), selling JPY 297.4bn worth of foreign bonds in the week ending February 10. Looking ahead, we think widening yield differentials between Japan and the US will ultimately encourage a return of outflows – with low FX hedge ratios – which will push the JPY significantly weaker in 2017 (we target USDJPY at 128 by year-end).